A question about leverage

Greetings and hello to all,

I'm a relatively new face around FF, as you can see by my post count, but I've been studying trading techniques for a little over a year. I got interested in trading by chance when I saw a thread about technical trading on a different forum, and the poster was kind enough to teach us his system and recommend books on the topic. He didn't primarily trade forex, however, and my introduction to trading was on the mini-Dow and mini-Russell 2000 index futures. While my goal is to eventually trade those, the capital requirements to effectively trade them are too steep for me at present time being a young IT professional with student loans looming over my head and the inability to up and quit to trade market hours.

When I discovered that you could trade the FX markets with a fraction of the capital, I opened up a mini-account and began to watch and put in a trade every now and then. I found the FF site a few weeks ago and have read over a lot of the posts here.

One thing I've seen mentioned a couple of times is that even though one is perfectly capable of trading with a $500 account size it is considered vastly under-capitalized. It seems the common sentiment is that you need to have a larger account size to be properly capitalized, and I've seen that number range from $20K - $250K. While a larger account means I can trade full sized lots and at a lower leverage, am I at some unrealized detriment trading with large leverage at the mini-lot level?

I'm not exactly sure how to answer your question but I'll give you my thoughts.

I wouldn't say that you're at a detriment because you have smaller account. Obviously you'd be making more money per trade with a larger account, but that's assuming that you're actually winning.
"Properly capitalized" will have a different definition for each person. If you're trying to trade for a living, then obviously a $500 or $1000 account won't cut it. If you're just trying to gain experience and maybe make a few bucks here and there then it's best to have a small account just in case the unthinkable happens and you blow it out.

For me personally, leverage is meaningless. It's all about money management and risk % per trade based on your stop loss.
With a balance of $500, I think trading mini lots is too big of a position size.
Because with a 30 pip stop you're risking 6% per trade which is a little high in most people's books. (unless your system has small stops) Micro lots would be the way to go to be safe and more flexible.

I know that doesn't really answer your question but there's no right or wrong answer for it. Having a small account just means it takes longer to increase your account balance. But if you're just starting out and not consistently profitable, then why risk losing more money until you're 100% ready.

All the best,
Tom

Yes, you are at a disadvantage; you'll get killed by the noise in the market; i.e. "gambler's ruin".

FX is generally very volatile, so that even if you pick the right direction on a trade it can easily go, short-term, against you, you need to have enough cash to wait out short-term counter trends. The actual numbers of course depend on your trading style, and that's probably best determined (at least to start) by taking a practice account and scaling your trades to the actual amount of money you have. For example. if you only want to work with 500$ using mini-lots, open a 5K practice account and trade full lots. Pay special attention to your worst drawdowns & on the practice account ignore, for the most part, the wins. It will at least give some idea of the risk involved.

My own rule-of-thumb is to limit myself to 10:1 leverage at most (e.g. 1K to play with for minilots, 10K per full lot), which can be increased a little for uncorrelated pairs or for adding on to trades that are already in the money.

In terms of money management, I have that very well covered. I was big into internet poker during the boom and before the US government decided to put a stop to it. The money management skills from poker transfer over to trading pretty much perfectly - never risk more then a small percentage of your total bankroll in a single game. As of right now, I trade $0.10/pip lot sizes with typical S/L between 10-20 pips, depending on the TF. So at any time, I have .2-.4% of my capital on the line. Once I start showing consistent profits, I'll eventually up it to the commonly accepted 2-3%.

I just wanted to make sure there was something I wasn't missing, which apparently there wasn't.